University Finance: MediMedia International Ltd. Case Study Solution

This case study solution analyzes the MediMedia International Ltd. leveraged buyout, addressing key financial challenges and valuation methods. The analysis begins by identifying the central issues: the buyout structure and debt financing arrangements. It then delves into the equity valuation, market values of financing components, and the returns on various financing options, including senior debt, mezzanine debt, and equity. The solution evaluates the mezzanine debt options, the embedded warrants, and the circularity issue in warrant valuation. The analysis further examines the cost of capital across different financing options and provides a methodology to solve the valuation circularity problem. The case study uses the DCF approach and the iterative technique to find the real value of equity. References include academic sources used for the analysis.

1. What is the big question in the case?
The MediMedia International Ltd Case depends on a current administrative and vital issue being
looked at by the association, which must be understood carefully to permit movement, just as
keep up a serious position. The case answer for the MediMedia International Ltd Case Study
initially distinguishes the focal issue that is expounded on all through the case. The significant
difficulties in the buyout had to do with arranging the exchange and organizing the debt
financing. The central issue is the structure of the buyout and Could the debt financing be
orchestrated. The entire case spins around these two issues. (Jelic et al., 2019)
2. How much is the equity worth?
As per the excel calculation:
Terminal Value: $54.21mn
NPV: $57.41mn
a. What are market values of various financing components.
The financing structure included the forceful utilization of debt, showed over a few levels of the
capital structure; the board additionally expected to support the debt from the solid cash flow of
the business, its development, and sought after working economies; at long last, the layer of
mezzanine debt included warrants, giving those speculators a play on MediMedia's equity.
(Witcher & Chau, 2013)
Sources US$ Mn
Existing Liabilities 1.13

Senior debt 32
Mezzanine debt 15
Vendor note 11
Equity 11
b. Compare return on various components to the benchmarks given in the case.
To make speculations regarding objective rates of return for bank moneylenders was
troublesome, albeit most banks experienced issues delivering returns of more than one per cent
on their whole credit portfolios. For exceptionally utilized exchanges. Spectators thought about
what inspired these bizarre highlights, and how, if by any means, they may add to the
achievement of the exchange. ("The Best Business Financing Options in 2020 Compared | Nav",
2020)
Mezzanine financial specialists searched for inside rates of return of somewhere in the range of
20 and 30 per cent
Institutional-equity financial specialists searched for inside rates of return of more than 40 per
cent.

Banks searched for inside rates of return of more than 2 per cent on advances
c. What options are valuable in the mezzanine debt?
The mezzanine fund is for the most part subjected to senior debt. It will regularly have a lesser
promise of security or be unbound. In this manner, mezzanine suppliers look solely towards the
cash flow created by the business to survey the probability of reimbursement. To make up for the
absence of security and the more danger of default ought to the investee organization experience
trouble; mezzanine debt regularly gets a higher pace of enthusiasm than a customary bank
advance. In particular, the loan fee is frequently in the scope of standard currency market rates
(LIBOR in the U.K.) in addition to 3 to 5%. There is additionally generally a further instalment
to the mezzanine supplier following 3 or 5 years identified with the expansion in the estimation
of the organization over that period. (Witcher & Chau, 2012) This last instalment can be made by
giving warrants which are convertible into customary offers in the organization. Regularly, the
Fund would expect the mezzanine account that it gives to have a 6 to multi-year ostensible
development however practical possibilities for refinancing or reimbursement from different
sources inside 3 to 5 years if the business is as fruitful as arranged. An institutional financial
specialist would, for the most part, anticipate an inside pace of return (IRR) of over 40% for
giving equity capital in an MBO, though a mezzanine moneylender would focus on an IRR of
somewhere in the range of 20% and 30%, contingent upon loan costs and the dangers inalienable
in the exchange. (Kuryłek, 2016)
d. Value the key options embedded in the financing.

Ordinary shares in MediMedia is comparable to 15 percent of its completely weakened ordinary
offer capital (or 1.94 million shares). Exercisable whenever for an ostensible thought (i.e., $0.01
per share) either in entire or to some degree at the alternative of the warrant holders. After the
seventh commemoration of the financing, the warrant holders may get shares obtained through
the exercise of the warrants to MediMedia at a cost for every offer equivalent to multiple times
income per completely weakened offer. There will be 12.94 million shares on a completely
weakened premise. (Brockhoff, 2014)
e. How is the circularity issue in warrant solved here?
This proposed exchange was structured around the great model for the utilized buyout: the
financing structure included the forceful utilization of debt, showed over a few levels of the
capital structure; the board additionally expected to support the debt from the solid cash flow of
the business, its development, and sought after working economies; at last, the layer of
mezzanine debt included warrants, giving those speculators a play on MediMedia's equity.
Eyewitnesses considered how huge the additions from improved working execution and debt
financing would be right now, how the new riches hence made would be parlayed among the
different members in the exchange.
2. What i******** cost ********pital across all financing options?
Financing Option CoC
Commerce Clearing
House 0.7

Elsevier 1.05
Euromoney
Publications 1.05
a. How do you solve the valuation circularity issue?
While esteeming an organization utilizing the DCF approach, we face the notable circularity
problem, where we have to know the cost of capital to value an organization. For the most part,
examiners utilize the market capitalization and the book value of debt while evaluating the cost
of capital. Since the last equity value that one gets regularly ends up being unique concerning the
underlying value used to gauge the cost of capital, this brings up issues about the very valuation
strategy itself. Hence, we have to use an iterative technique that can be utilized to locate the real
value of equity that one should use to evaluate the cost of capital and along these lines value an
organization in any event. (Mohanty, 2016)

References
Brockhoff, K. (2014). Exploring Strategic R&D Success Factors. Technology Analysis &
Strategic Management, 15(3), 333-348. https://doi.org/10.1080/09537320310001601513
Jelic, R., Zhou, D., & Wright, M. (2019). Sustaining the Buyout Governance Model: Inside
Secondary Management Buyout Boards. British Journal Of Management, 30(1), 30-52.
https://doi.org/10.1111/1467-8551.12301
Kuryłek, Z. (2016). Specifics and Influence of Mezzanine Capital on Financial Results in Polish
Companies. Zeszyty Naukowe Uniwersytetu Szczecińskiego Finanse Rynki Finansowe
Ubezpieczenia, 1, 901-912. https://doi.org/10.18276/frfu.2016.79-70
Mohanty, P. (2016). A Practical Approach to Solving the Circularity Problem in Estimating the
Cost of Capital. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.413240
The Best Business Financing Options in 2020 Compared | Nav. Nav. (2020). Retrieved 14 March
2020, from https://www.nav.com/business-financing-options/.
Witcher, B., & Chau, V. (2012). Varieties of Capitalism and Strategic Management: Managing
Performance in Multinationals after the Global Financial Crisis. British Journal Of
Management, 23, S58-S73. https://doi.org/10.1111/j.1467-8551.2012.00816.x
Witcher, B., & Chau, V. (2013). What Kind of Capitalism for Strategic Management?. Academy
Of Management Proceedings, 2013(1), 15982.
https://doi.org/10.5465/ambpp.2013.15982abstract